College graduates today typically leave campus with $20,000 to $30,000 in student loan debt. This is the second-largest type of debt in the US after credit card debt.
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One way to reduce the interest you pay on your student loans is to refinance your loans. In this case, your new lender pays off your old student loans and issues you a new loan. The new loan often features better terms, such as a lower interest rate and/or a lower monthly payment. This can make repayment more manageable.
Financial experts say that as many as 8 million student loan holders in the US may be eligible to refinance their loans into a lower rate. Refinancing generally is done for people in their late 20s and early 30s, who are established in jobs and may already own a home. Refinancing typically is a good option for people who are relatively financially secure and are not in need of federal student loan protections.
Many students discover that refinancing student loans can save them more than $20,000 over the life of their loans. For students who have health-related degrees, the savings might even be higher than that.
If you are considering a refinance of your student loans, you should ask yourself these questions first:
1. Why Am I Refinancing?
Many borrowers want to lower their interest rate. Others want a simpler repayment plan, such as combining several loans into one. Federal student loan holders typically want to refinance into a private loan to lower their rate and payment. However, refinancing federal student loan debt into private debt has risks. You no longer qualify for student loan deferment. Nor will you qualify for various federal loan forgiveness programs.
2. What Is Good/Bad About Each Lender?
Every private student loan lender has a sales pitch and you should do your shopping and research. Some companies have been around for decades, such as Wells Fargo. If you have a Wells Fargo loan now, you may be able to stay with the bank and refinance into a lower rate.
Other lenders are new, such as SoFi, which is a new, investor-backed startup lender. This company lends money from a pool that is funded by college alumni and various accredited investors who seek a good return on their money. Costs for such lenders are generally lower than regular banks.
3. What Rate Can You Get?
Everyone wants a lower rate. But comparing interest rates between student loan lenders is tricky. Rates will vary considerably depending upon the loan term; a shorter term has a lower rate. Your credit also makes a big difference.
If you do want to refinance your student loans with a private lender, you will increase your odds of approval by following our guidelines below.
Getting Approved To Refinance Student Loans
When you refinance your student loans, you are working with a private student loan lender. Private student loan lenders usually have strict underwriting guidelines. They are lending you money and are putting their capital at risk; these companies are not backed by the US government, so they have to be careful who they approve for a refinance.
Every private lender will have its own specific underwriting guidelines. Each applicant’s financial circumstances and background is different, as well. There is no way to guarantee that you will be approved for a student loan refinance. But you can boost your chances for a student loan refinance by keeping these tips in mind:
Keep Your Credit Score High
Your FICO score is the main barometer of your level of financial responsibility. The majority of private student loan lenders will evaluate your credit score to ensure that it is likely that you will pay your debts. They will look especially closely at your payment history for the last two years. Generally, private student loan lenders want to see a FICO score in the high 600s, and 700s is better.
Have Sufficient Income
Lenders need to see that you have enough steady, documented income to repay your debts. Lenders need to see concrete evidence that you have stable income each month with positive cash flow. Take a look at your pay stubs and see what your after tax income is each month. When you take out your proposed monthly student loan payment, do you have enough for your other living expenses?
Don’t have enough income to qualify? Your chances for approval go up if you can get a cosigner on your loan.
Debt Load
Lenders will examine your other consumer debt, including credit cards, car loans, and mortgage. This will influence whether you are approved by underwriting for your refinance. Lenders will add up your total monthly debt payments to see if you will be likely to be able to pay your new student loan back.
You can increase your odds of being approved for a student loan refinance immensely by paying down credit card debt as much as possible before you apply.
Stable Employment
It is important to be employed, or have a written job offer when you apply for your refinance. Some lenders may refinance your loans while you are still in school; other lenders will want you to be employed. If you are self employed, you can still be approved for a refinance. But you will usually need to provide two years of tax returns and a profit and loss statement for the current tax year.
Options If You Are Rejected for a Refinance
Sometimes you will be rejected for a student loan refinance. What should you do? Try the options below.
Apply to Several Lenders
There are thousands of private student loan lenders out there. There is no limit on the number of times you can apply. Try applying to several lenders, such as banks and credit unions and new, private lender startups. If you apply to several lenders in a one month period, this is usually counted as one inquiry on your credit report.
Verify Your Credit Report
There are many cases where there are mistakes on credit reports. A negative item on your report may have been counted twice. Or, a negative item that was supposed to be removed could still be there. If you detect any errors on your credit report, you should file a dispute with each credit bureau.
You are entitled to a free copy of your credit report each year from Equifax, Experian and Transunion.
Consolidate Your Debt
If you have credit card debt, you should try to consolidate it if possible into a lower interest loan. If you own a home with equity, you may consider taking out a home equity line of credit or home equity loan. These second mortgages feature much lower interest rates than credit cards. Mortgage debt is also viewed more favorably for the most part by lenders.
Pay Off Debts
Lenders may reject you because your debt to income (DTI) is too high. If you drop your debt or increase your income, this improves your DTI. Experts recommend careful budgeting to reduce your monthly expenses and to more effectively manage your finances. Extra money freed up each month can be used to pay off debt.
Boost Your Income
If you can boost your income, you reduce your debt to income ratio. Try to get a raise, get a larger bonus, or get a part time job. There are many ways to make extra money online today, as long as you have a good Internet connection.
Get a Co-Signer
Ask someone you trust to be your co-signer for your student loans. He or she needs to have a strong credit score and be willing to be responsible along with you for your student loan debt.
The Bottom Line
Refinancing your student loans with a private lender can save you a lot of money. Be sure you follow the advice above carefully to get you on the right track financially.
References
- Refinance Student Loans. (2017, Feb. 17). Retrieved from https://www.forbes.com/sites/zackfriedman/2017/02/17/refinance-student-loans/
- 3 Questions to Answer Before Refinancing Student Loans. (2015, March 11). Retrieved from https://www.usnews.com/education/best-colleges/paying-for-college/articles/2015/03/11/3-questions-to-answer-before-refinancing-student-loans
